Recently, the Delhi High Court dealt with the issue of taxability of inland haulage charges in the hands of foreign shipping companies and the consequent withholding tax implications.
Taxability of foreign shipping companies (FSC) in India has, traditionally, been a subject matter of judicial analysis.
While clarity has been more or less achieved on the taxability of freight income of FSC, the incidental income of FSC in India continues to be litigative. Recently, one such incidental income, namely, inland haulage charges (IHC), was a subject matte r of interpretation by the Delhi High Court.
FSC are primarily engaged in the business of operation of ships in international waters and undertake to deliver the cargo from the shippers to the consignees.
Since the shippers or consignees are situated at different inland locations away from ports, FSC provide incidental services of inland haulage and recover IHC from the shippers.
While the FSC would like to charge one consolidated amount for the shipment of cargo, for the sake of transparency, IHC are separately indicated in the invoice. In shipping terminology, IHC refers to inland carriage of cargo or containers between locations.
IHC are collected by FSC (or their Indian agents on their behalf) from shippers for carriage of cargo or containers between locations or points in India.
Under the Income-Tax Act, FSC are liable to tax on presumptive basis ( 7.5 per cent of certain collections are deemed to be income chargeable to tax in India).
Prior to Finance Act, 1997, only freight collections of FSC were chargeable to tax in India. Other receipts such as demurrage, handling charges, and so on, were not taxable in India, as was held by the Karnataka High Court in the CBDT vs Chowgule & Co. Ltd (192 ITR 40) and V. M. Salgaocar & Bros. Ltd vs Deputy Controller & Ors (187 ITR 381) cases.
Subsequently, the Finance Act, 1997, included other receipts such as demurrage charges, handling charges or any other amount of a similar nature within the ambit of Sections 44B and 172. This amendment was made with retrospective effect from April 1, 1976.
Splitting of receipts
As per the CBDT Circular No. 763 dated February 18, 1998, this amendment was brought about to prevent FSC from splitting their receipts and inflating other receipts such as demurrage or handling charges.
As such, after this amendment, all other receipts, including IHC, are clearly intended to be covered under Sections 44B/172 and taxable as such. Recently, the Delhi High Court, in Freight Systems (India) Pvt. Ltd, dealt with the issue of taxability of IHC in the hands of FSC and the consequent withholding tax implications on payment of IHC to FSC (or their Indian agents).
The tax departments appeal before the High Court was against the Delhi Tribunal decision in the ITO vs Freight Systems (6 SOT 473) case, wherein it had held that no tax needs to be withheld under Section 194C of the I-T Act on payments made towards IHC. The Tribunal had observed that IHC are covered by Section 172(8) of the I-T Act.
Accordingly, in view of CBDT Circular No. 723 dated September 19, 1995, which clarifies that the provisions of Section 194C are not applicable to amounts covered under Section 172, the Tribunal held that the assessee, the Indian company, was not liable to withhold tax at source under Section 194C of the I-T Act on payments made to Indian agents of FSC towards IHC.
The Delhi High Court has now dismissed the departments appeal against the aforesaid order of the Tribunal. In doing so, the High Court has relied on its earlier decision in the Continental Carriers Pvt. Ltd [unreported] case, wherein it was similarly held that IHC are covered by Section 172 of the I-T Act and, consequently, the withholding tax provisions of Section 194C would not apply on payment of IHC to agents of FSC.
In view of the above, the position is now settled that IHC received by FSC or their Indian agents (on their behalf) are covered by Section 172.
Consequently, no tax needs to be deducted at source under Section 195 or 194C on payment of IHC by shippers.
This decision of the Delhi High Court not only comes as a breather for FSC but also relieves the shippers from the onus of withholding tax on such payments.
Nikhil Rohera Faizan Nursumar (The authors are with PricewaterhouseCoopers.)